1. The basis of trade Suppose that France and New Zealand both produce cheese an

Question

1. The basis of trade

Suppose that France and New Zealand both produce cheese and wine. France's opportunity cost of producing a bottle of wine is 2 pounds of cheese. That is, France forgoes the production of 2 pounds of cheese when it produces a bottle of wine. New Zealand's opportunity cost of producing a bottle of wine is 4 pounds of cheese.

a comparative advantage in the production of wine.

a comparative advantage in the production of cheese.

1. The basis of trade

Suppose that France and New Zealand both produce cheese and wine. France's opportunity cost of producing a bottle of wine is 2 pounds of cheese. That is, France forgoes the production of 2 pounds of cheese when it produces a bottle of wine. New Zealand's opportunity cost of producing a bottle of wine is 4 pounds of cheese.

a comparative advantage in the production of wine.

a comparative advantage in the production of cheese.

Explanation / Answer

From theory, we know that, a country has comparative advantage in a commodity if its opportunity cost is less than the other country.

Now as France's opportunity cost of producing a bottle of wine is 2 pounds of cheese which is less than New Zealand's opportunity cost of producing a bottle of wine is 4 pounds of cheese.

Then France has a comparative advantage in the production of wine.

Now, New Zealand's opportunity cost of producing 1 pound of cheese is 1/ 4 bottles of wine which is less than France's opportunity cost of producing 1 pound of cheese is 1/ 2 bottles of wine.

So, New Zealand has a comparative advantage in the production of cheese.

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